Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-21
E8–13.
Req. 1a
Cash (+A) ……………………………………………………………………
15,000
Accumulated depreciation (−XA, +A) ………………………………
23,000
Delivery truck (−A) …………………………………………………….
38,000
Sale of an asset at book value; the result is no loss or gain.
Req. 1c
Cash (+A) ……………………………………………………………………
14,600
Accumulated depreciation (−XA, +A) ………………………………
23,000
Loss on sale of long-lived asset (+Loss, −SE) ………………….
Delivery truck (−A) …………………………………………………….
38,000
Sale of an asset below book value; the result is a loss.
Req. 2 Summarization of the effects of the disposal:
1. The loss or gain on disposal of a long-lived asset is the difference between the
disposal price and the book value at date of disposal.
2. When the disposal price is the same as the book value there is no loss or gain;
Cash (+A) ………………………………………………………………….
15,600
Accumulated depreciation (−XA, +A) …………………………….
23,000
Gain on sale of long-lived asset (+Gain, +SE) ……………..
Delivery truck (−A) …………………………………………………..
38,000
Sale of an asset above book value; the result is a gain.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
E8–14.
Req. 1a
Cash (+A) ……………………………………………………………………
500,000
Accumulated depreciation (−XA, +A) ………………………………
5,500,000
Furniture (−A) …………………………………………………………..
6,000,000
Sale of an asset at book value; the result is no loss or gain.
Cash (+A) ………………………………………………………………….
Accumulated depreciation (−XA, +A) …………………………….
5,500,000
Gain on sale of long-lived asset (+Gain, +SE) ……………..
Furniture (−A) …………………………………………………………
6,000,000
Sale of an asset above book value; the result is a gain.
Req. 1c
Cash (+A) ……………………………………………………………………
400,000
Accumulated depreciation (−XA, +A) ………………………………
5,500,000
Loss on sale of long-lived asset (+Loss, −SE) ………………….
100,000
Furniture (−A) …………………………………………………………..
6,000,000
Sale of an asset below book value; the result is a loss.
Req. 2 Summarization of the effects of the disposal:
2. When the disposal price is the same as the book value there is no loss or gain;
3. The book value does not purport to be market value, so a loss or gain on disposal
of a long-lived asset normally would occur.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-23
E8–15.
Req. 1
Depreciation expense per year:
$6,000 accumulated depreciation 3 years of usage = $2,000 per year
Req. 2
December 31, 2012:
Depreciation expense (+E, −SE) ………………………………
2,000
Accumulated depreciation (+XA, −A) ……………………..
2,000
Accumulated depreciation ($6,000 + $2,000) (−XA, +A )
Loss on disposal of truck (+Loss, −SE) ……………………..
Truck (−A) ………………………………………………………….
E8–16.
Req. 1
Computation of acquisition cost of the deposit in 2012:
February 2012: Purchase of mineral deposit $ 700,000
March 2012: Preparation costs 74,000
Total acquisition cost in 2012 $ 774,000
Req. 2
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
E8–17.
Req. 1
Acquisition cost:
Technology $70,000
Req. 2
Amortization on December 31, 2012 (straight-line method with no residual value):
Req. 3
Income statement for 2012:
Operating expenses:
Amortization expense ($17,500 + $400)
$17,900
Balance sheet at December 31, 2012:
Intangibles:
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-25
E8–18.
Req. 1
Acquisition cost:
Copyright $12,300
Req. 2
Amortization on December 31, 2011 (straight-line method with no residual value):
Copyright: $12,300 x 1/10 = $1,230 amortization expense
Req. 3
Income statement for 2011:
Operating expenses:
Amortization expense ($1,230 + $2,450)
$3,680
Intangibles:
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
E8–19.
Req. 1 (January 1, 2012):
Leasehold improvements (+A) ……………………………………….
375,000
Cash (−A) ………………………………………………………………..
375,000
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-27
E8–20.
Item
Location
1. Depreciation expense.
(a) Income statement, or
(b) Statement of cash flows, or
(c) Notes to the financial statements
3. Prior year’s accumulated
depreciation.
(a) Balance sheet, or
(b) Notes to the financial statements
5. Net amount of property, plant,
and equipment.
(a) Balance sheet, or
(b) Notes to the financial statements
(b) Increase in assets on the balance sheet
(c) Notes to the financial statements
6. Whether the company has had
(a) Statement of cash flows
7. Policies on amortizing intangibles.
Notes to the financial statements
8. Any significant gains or losses on
(a) Income statement, or
(b) Statement of cash flows, or
(c) Notes to the financial statements
9. The amount of assets written off as
(a) Income statement, or
2. The detail on major classifications
of long-lived assets.
(a) Balance sheet, or
(b) Notes to the financial statements
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
E8–21.
December 31, 2011:
Adjusting entry for 2011 depreciation:
Depreciation expense (+E, −SE) …….. ……………….
8,000
Accumulated depreciation, equipment (+XA, −A)
8,000
Computation:
($58,000 net book value – $10,000 residual value) x 1/6 = $8,000
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-29
E8–22.
Req. 1
Equipment (+A) ……………………………………………………….
15,500
Cash (−A)…………………………………………………………..
15,500
Req. 2
Age of Machine A at December 31, 2012:
Computations:
Cost when acquired ……………………………………………………….
$30,000
Less: Accumulated depreciation (2 years) …………………………..
10,200
Undepreciated balance ……………………………………………………….
19,800
Add: Major renovation cost ……………………………………………………….
15,500
Total ……………………………………………………………………………………
$35,300
Annual depreciation:
Req. 4
Requirement (1) assumed that the major renovation and improvement cost was a
capital expenditure rather than a revenue expenditure. Because capital expenditures
benefit future periods, the expenditure is added to the net book value of the asset and
then is depreciated over the remaining life of the asset.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-30
E8–23.
Req. 1
Depreciation expense prior to the change in estimates:
Req. 2
Depreciation expense after the change in estimates:
Step 1 – Age of the asset: $78,000 accumulated depreciation $6,000 annual expense
= 13 years of depreciation to date.
The building has been depreciated over 13 years as of the beginning of the
year.
Req. 3
The depreciation expense increases by $7,500 each year for the next 17 years.
Therefore, net income will be lower by $7,500 (ignoring taxes) each year; this in turn will
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
PROBLEMS
P8–1.
Req. 1
Long-lived assets are tangible and intangible resources owned by a business and used
in its operations over several years. Tangible assets (such as property, plant, and
Req. 2
January 2 purchase:
Equipment (1) (+A) ……………………………………………………
86,410
Accounts payable(2) (+L) ………………………………………
32,010
45,000
2,000
5,000
Computations:
(1) Equipment: $85,000 invoice – $990 (3% of $33,000 cash to be paid*)
+ $2,400 installation
* Assets are recorded at the cash equivalent price
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
P8–1. (continued)
Req. 3
Date
Assets
Liabilities
Stockholders’ Equity
Jan 2
Equipment
Cash
+86,410
–2,400
Note payable
Accounts
payable
+45,000
+32,010
Common stock
Additional paid-in
capital
+2,000
+5,000
Req. 4
Cost of the machinery includes installation costs. Freight was excluded because it was
an expense paid by the vendor. No discount was taken because Cruz Company paid
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-33
P8–2.
Req. 1
Building
Accum.
Deprec.
Deprec.
Expense
Repairs
Expense
Cash
Balance 1/1/11
$820,000
$410,000
Depreciation
for 2011
41,000
$41,000*
NE
Balance prior to
expenditures
820,000
451,000
41,000
a.
NE
NE
NE
+$7,000
−$7,000
Req. 2
Book Value of Building on December 31, 2011:
Req. 3
Depreciation is a noncash expense. Unlike most expenses, no cash payment is made
when the expense is recognized. The cash outflow occurred when the related asset
NE
NE
c.
NE
NE
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
P8–3.
Req. 1
Cost of each machine:
Machine
A
B
C
Total
Purchase price ………………………………
$11,000
$30,000
$8,000
$49,000
Installation costs …………………………….
Renovation costs …………………………...
Total cost …………………………………..
$56,000
Req. 2
Computation of depreciation at the end of year 1 for each machine:
Machine
Method
Computation
A
Straight-line
($14,000 − $1,000) x 1/5 = $2,600
C
($10,000 −$0) x 2/4 = $5,000
Adjusting entry:
Depreciation expense ($2,600 + $2,400 + $5,000) (+E, −SE)
10,000
Accumulated depreciation, Machine A (+XA, −A)
2,600
Accumulated depreciation, Machine C (+XA, −A)
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-35
P8–4.
Req. 1
Depreciation expense of $464 recorded in the current year is inferred from the
activities affecting the Accumulated Depreciation account:
Req. 2
Recording depreciation at the end of the period increases expenses (and thus
decreases net income and stockholders’ equity) and decreases the net book value of
the property and equipment accounts. Failing to record depreciation creates the
opposite effects.
Ratio
Computation
Effect on Ratio of Failing to
Record Depreciation Expense
Earnings per
share
Net income
Number of shares of stock
outstanding
Net income will be overstated
with no change in the
denominator → Overstated
Return on
assets
Net income
Average total assets
Net income is overstated and so
is average total assets although
at a lower amount due to
averaging → Overstated
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
P8–5.
Req. 1
a. Straight-line:
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
1
2
b. Units-of-production: ($106,000 – $2,000) 200,000 = $0.52 per unit of output
Year
Computation
Depreciation
Expense
Accumulated
Depreciation
Net
Book Value
At acquisition
$106,000
1
2
c. Double-declining-balance:
Year
Computation
Depreciation
Expense*
Accumulated
Depreciation
Net
Book Value
At acquisition
$106,000
1
($106,000 – $0) x 2/13
$16,308
$16,308
89,692
2
Req. 2
Cash flow—For tax purposes, the declining-balance (DB) method usually is viewed as
preferable because an early tax deduction is preferable to a later tax deduction. DB
depreciation expense is highest; therefore, it yields lower taxable income and therefore
lower income tax payable (and lower cash outflow) in the early years. In later years, this
effect would reverse. Other than cash outflows for taxes, cash flows are unaffected by
the method chosen by management for financial reporting purposes. Companies may
select different methods for tax and financial reporting.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-37
P8–5. (continued)
Recommendation to Ford Motor Company’s management—Companies may choose a
different method for tax purposes than for financial reporting purposes. The goal of
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
P8–6.
Req. 1
a. Machine A – Sold on Jan. 1, 2012:
(1)
Depreciation expense in 2012 – none recorded because disposal
date was Jan. 1, 2012.
(2)
To record disposal:
Cash (+A) ………………………………………………………………..
7,200
Accumulated depreciation, Machine A (−XA, +A) …………..
13,500
b. Machine B – Sold on December 31, 2012:
(1)
To record depreciation expense for 2012:
Accumulated depreciation, Machine B (+XA, −A) …….
(2)
To record disposal:
Cash (+A) ………………………………………………………………..
2,500
Note receivable (+A)………………………………………………….
6,000
41,000
c. Machine C – Disposal on January 1, 2012:
(1)
Depreciation expense in 2012 – none recorded because disposal
date was Jan. 1, 2012.
(2)
To record disposal:
Accumulated depreciation, Machine C (−XA, +A) …………
56,000
Loss on disposal of machine (+Loss, −SE) …………………..
19,000
Equipment (Machine C) (−A) ………………………………..
75,000
Req. 2
Machine A: Disposal of a long-lived asset with the price below net book value results in
a loss.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-39
P8–7.
Req. 1
Fixed Assets
Beg. balance
24,839.2
Accumulated Depreciation
8,365.1
Beg. balance
1,083.3
1,812.3
Depreciation expense
Impairment loss
9,135.5
End. balance
Req. 2
Net book value of the disposals and transfers:
$4,129.3 cost − $1,083.3 accumulated depreciation
$3,046.0
Req. 3
Percentage depreciation expense to cash flows from operations
Acquisitions
4,418.0
4,129.3
Disposals/transfers
End. balance
25,127.9
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
8-40
P8–8.
Req. 1
Date
Assets
Liabilities
Stockholders’ Equity
a.
Jan. 1
Patent
Cash
+28,000
–28,000
b.
Jan. 1
Assets (not detailed)
Goodwill
Cash
+154,000
+10,000
–164,000
Machine B
+5,000
(1)
($25,000 – $5,000) x 1/5 = 4,000
(2)
Accumulated depreciation to Jan. 1, 2011 ……………….
$16,000
Add: Depreciation expense for 2011 ……………………….
Total accumulated depreciation ………………………….
$20,000
(3)
Cash proceeds of disposition…………………………………
$6,000
Net book value of Machine A ($25,000 – $20,000) ……
5,000
Gain on disposal of long-lived asset ……………………
$1,000
Req. 2 December 31, 2011 depreciation and amortization:
a.
Patent: $28,000 7 years = $4,000 amortization expense.
c.
Leasehold improvements: No amortization since constructed on December 31.
e.
Machine A: Machine A was sold on December 31, 2011. Depreciation expense
was recorded prior to the sale. No additional depreciation is necessary.
Leasehold improvements
Cash
e.
Accumulated depreciation,
Depreciation
Machine A
Accumulated depreciation,
Cash